Take-or-pay

Take-or-pay is a contractual clause between two companies. It stipulates: the buyer must take delivery of a certain quantity of goods or services — or, if they fail to do so, still pay the agreed minimum amount. The name says it directly: “take it or pay for it.” That sounds harsh, but it makes clear sense for both sides. The seller knows from day one how much money they will earn at minimum. The buyer, in return, often secures a fixed price and guaranteed access to a resource they urgently need.

Take-or-pay as the foundation for billion-dollar investments

Such clauses exist because some projects are only economically viable if revenues flow reliably from the start. A liquefied natural gas terminal — a facility that liquefies natural gas and loads it onto ships — costs several billion euros to build. No bank will finance that if it’s unclear whether the facility will ever be utilized. A take-or-pay contract with an energy supplier solves this problem: the revenues are contractually secured, and the project becomes financeable.

This makes take-or-pay a tool for risk allocation. Without the clause, the seller bears the entire utilization risk alone. With it, part of this risk is transferred to the buyer — who typically receives more favorable terms in return than on the open market. It is therefore a trade-off: the buyer gives up flexibility and in exchange gains price and supply security.

Structure of a typical take-or-pay contract

The contract first establishes a minimum quantity, often referred to in English as the “minimum contract quantity.” If the buyer falls short of this quantity, the compensation payment kicks in. Its amount is determined by multiplying the agreed price by the shortfall quantity. For example, if a gas supplier has committed to taking ten billion cubic meters of gas annually, and only takes seven, they pay the difference for three billion cubic meters — even if not a single molecule of it ever flowed.

Many contracts also include what is known as a make-up clause. This allows the buyer to still draw on the quantity already paid for but not taken, at a later point in time. This softens the harshness of the arrangement: the buyer doesn’t lose their money entirely but essentially buys the quantity in advance, for later use. Nevertheless, the liquidity problem remains — they must pay first before receiving anything.

The contract term is also crucial. Take-or-pay contracts rarely run for less than five years, often ten to twenty years. This is because the underlying infrastructure only pays for itself — that is, recoups its construction costs — over a very long period. This long-term commitment is the biggest disadvantage for the buyer: if the market changes, they remain bound to the old price and the old quantity regardless.

Take-or-pay in current debates

During the energy crisis starting in 2021, the term frequently appeared in the news. Many European countries had long-term take-or-pay contracts with Russian gas suppliers. When political pressure arose to sever these supply relationships, it quickly became clear that simply canceling them was not possible without risking heavy penalty payments. This vividly illustrated how much such clauses can restrict countries' foreign policy room for maneuver.

Today, take-or-pay contracts also play a role in new energy projects. When building hydrogen infrastructure or importing liquefied natural gas from the US or Qatar, such clauses are almost always part of the financing structure. For readers of business news, the term is thus no relic — it regularly stands at the center of investment decisions that will shape Europe for decades.